Vince Cable speaks to the SMF on reforming executive pay

24 January 2012

Rt Hon Vince Cable, Secretary of State for Business Innovation and Skills, has today given a speech to the Social Market Foundation outlining his plans for reforming executive pay.

At an event sponsored by ACCA at the British Academy in London, Vince Cable explained the Government's proposed measures to tackle excessive executive pay on four fronts: to boost transparency; give shareholders more effective control; increase the diversity of remuneration committees; and encourage major businesses and investors to lead by example.

Vince Cable said: "There is now broad consensus across the main political parties and many business and investor groups in support of 'responsible capitalism'. This precludes lavish payouts for failure or mediocrity, and addresses widening inequalities in remuneration.

"There is also a common understanding that Britain’s recovery from its profound economic crisis must be led by successful private enterprise and that entrepreneurs and good managers will expect competitive rewards. The debate on executive pay has to reconcile these two objectives".

Dr Cable set out the "logical absurdity" of executive pay, whereby executives believe they should be paid well above the average and benchmarked against similar roles in the US.

He explained that the Government's role in reforming executive pay should be to be "pro-market but not naively free market".

Dr Cable said: "I do not want to see private sector salaries being set in Whitehall, but I do accept the business view that Government has a legitimate role in finding answers to what is a market failure."

Specific proposals for tackling excessive executive pay included:

  • Boards and their remuneration committees will have to explain why they have used specific benchmarks and how they have taken employee earnings into account in setting pay

  • Companies will have to explain how they have consulted and taken into account the views of employees

  • Companies will have to open up the performance criteria for bonuses

  • Companies will be mandated to produce a distribution statement outlining how executive pay compares with other dispersals

  • Binding shareholder votes on the future pay policy for the Board, including a statement of how shareholders' views have been taken into account

  • A requirement to get binding shareholder approval for more than a year's salary and contracts giving notice periods longer than a year.

  • Shareholders will get a vote on how the company has implemented the approved pay policy in the preceding year.

  • Two directors on every board who are new and have not previously served on boards.

  • Adopting Lord Davies' recommendations designed to boost the proportion of women on boards

  Download a full copy of the speech here

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